VAT: You can’t sell goods you don’t own

Neil Warren considers the case of Quality Engines Direct Ltd(QEDL), which concerned two sales of silver ingots, where the VAT at stake was £60,062. The court decided that no output tax was payable on those sales because the company didn’t own the goods.

What is a silver ingot?

My first thought when I read this fascinating case (TC06403) was: what is an ‘ingot’? A Google search confirmed it was a “block of steel, gold, silver or other metal, typically oblong in shape”.

The first question to consider is how a company whose main activity is to sell engines for road vehicles could make two sales of silver ingots for the princely sum of £360,374, supposedly to Microring Ltd (with sales invoices raised by QEDL to Microring).

HMRC assessed output tax of £60,062 ie one-sixth of the proceeds. The assessment was raised by HMRC according to VATA 1994, s 73(1), using its powers of best judgment.

Bizarre trading situation

The trading background is unusual, to say the least. The director of QEDL, Mr Rafiq, claimed that he had agreed to sell the shares in his company for £5,000 to a Mr Healey. Then, soon after their meeting but before an actual deal was agreed, a large package of silver arrived at the trading premises of QEDL, which was subsequently removed at the insistence of Rafiq.

However, two receipts for £177,660 and £182,714 appeared in the bank account of QEDL which, following discussion with Healey, led to two payments out of the account being made for £175,417 and £180,000 to a separate company called Progress-Consul 7. The balance remaining of £4,957 being relevant to the purchase of the shares by Healey.

No knowledge

Rafiq denied issuing the two sales invoices to Microring and also claimed to have no knowledge about the silver (neither he nor his company had ever owned it) or the payments into the company’s bank account. He said that Healey was seeking to acquire a shell company rather than a trading business. The appeal was allowed.

The judge said: “We accept Mr Rafiq’s evidence that the movements in QEDL’s account represent Mr Healey using QEDL for his own purposes rather than representing payment to QEDL by Microring for the Silver.”

Learning points

The tribunal report read a bit like a scene from the BBC drama McMafia with goods and money appearing in all sorts of places, which no-one seemed to know where they came from or where they were going to. Amongst the confusion, the sole question was whether QEDL ever owned the silver so that it could sell it on as a taxable supply.

The judge felt the answer was ‘no’, so the assessment had to be withdrawn. This was a very strange case and the phrase ‘balance of probabilities’ was used by the judge in his report.

The conclusion is that a business cannot sell goods it does not own in the first place, and the other important message is to never reveal your bank accounts details unless it is absolutely necessary!

Input tax claims

Another learning point (a mirror image to the silver deal) is that you can’t claim input tax on goods you don’t own, even if you have a tax invoice made out to your business for the goods in question.

I recently dealt with a query where a supplier incorrectly addressed an invoice to an associated company with a similar name. The solution in this situation is to get the supplier to issue an invoice to the correct company and not for the associated company to make an incorrect input tax claim.

Replies

If you cannot claim VAT on goods that you don't own, I presume you don't have to pay over the VAT when you sell them. A lot of companies have the phrase "goods not yours until paid for". I really don't think customs are interested unless, of course you're talking about £60k+ but an interesting post.

Neil, interesting tribunal case and one that tests the very basis of accruals accounting. Does this take the world back to the principle of bartering, if cash has not been paid in exchange for goods? Indeed, does this go to the very basis of currency? Have a look at that bank note; the promise might mean that you do not own the assets that backs that promise and the note is worthless!! Difficult concept, particular here in Scotland where there is not the principle of "legal tender". Very interesting problem and challenges that old chestnut; "possession being nine-tenths of the law". Is the whole credit system in doubt or is this a case of the law (or those expressing it) being an [***]?

I don't think the above two replies get the point. In the case in question, there was no contractual basis for the silver being received - simply putative money laundering. Normally when you sell under a retention of title clause, the intention is that the buyer can re-sell the items with valid title - and that presumably is a taxable supply. What you are trying to ensure by the Retention of Title is that, if the customer goes bust before he has sold the goods, you can get them back (spoiler alert; bitter experience shows that even if you do, they will be unusably damaged).

The recommended wording for a Retention of Title clause used to be, "The goods are at the risk of the buyer from delivery but title does not pass until the buyer has made full and unconditional payment of this invoice and all other amounts owing to the seller".

And it can be worth speaking to a solicitor about RoT clauses. It can be useful to have a right of access to premises to take goods back and also add a requirement they be kept separate and identified (and they need to be in the contract - not just appearing after the contract is made on an invoice - too late).
If you get it wrong the clause does not work and it can amount to a registrable charge void for want of registration.
There has also been a difficult legal issue - that plenty of big buyers require a warranty the seller owns the goods and yet plenty of sellers do not own the goods at the point of resale although some RoT clauses do not allow resale until full payment has been made.

Anyway it sounds like the silver ingots were part of some complex dodgy dealing so not quite your standard retention of title issue.